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2nd August 2014

Singapore Economy

MTI replies: Restructuring at a balanced pace

Source: Straits Times / Insight

ECONOMIC restructuring is a long-term undertaking. Some analysts have
cited the slowdown in second-quarter GDP growth as evidence that economic
restructuring is failing. It is too hasty to draw such conclusions from a
single quarter of economic data.

Weak GDP growth in the second quarter is not reflective of the impact of
economic restructuring. Given Singapore's externally oriented economy,
quarter-to-quarter fluctuations are to be expected. For the first half of this
year, GDP growth averaged 3.4 per cent year on year, representing a healthy
growth rate given our stage of economic development.

Latest leading indicators such as the Purchasing Managers' Index for the
manufacturing sector and Business Expectations Survey for the service sector
have shown that business sentiment and outlook for the rest of the year have
generally improved in tandem with an expected improvement in the global
economy.

It is important for analysts to consider other indicators beyond GDP
when assessing the state of the economy.

In the second quarter of this year, the net formation of companies and
businesses was 8,837, higher than the quarterly average of 5,051 establishments
in 2013.

Singapore remains an attractive location for doing business. In the
first quarter, investment commitments remained healthy, with fixed assets
investment and total business expenditure commitments coming in at $2.5 billion
and $1.3 billion respectively.

Labour market conditions are healthy, with the resident unemployment
rate at 2.8 per cent in June this year.

Steady wage growth remains. The nominal median gross monthly income from
work of employed residents (including the employer Central Provident Fund
contribution) rose by 6.5 per cent in 2013.

We are restructuring our economy at a balanced pace. We need to press on
with restructuring at a steady, sustainable pace. To give firms sufficient time
to adjust, we have introduced measures in phases.

The reductions in dependency ratio ceilings were announced two years
before they take full effect. We have also provided support packages such as
the Wage Credit Scheme.

While overall productivity growth remains weak, we have seen improvement
in competitive sectors. From 2009 to 2013, labour productivity grew by 2.9 per
cent per year, within the National Productivity and Continuing Education
Council's productivity growth target of 2 per cent to 3 per cent per annum
until 2020.

This aggregate figure, however, masks cyclical fluctuations. Recent
productivity growth has been weak, with labour productivity up 0.2 per cent per
year from 2010 to 2013.

However, a sectoral analysis gives a clearer picture. From 2010 to 2013,
exportable sectors such as precision engineering, transport engineering and
finance and insurance showed healthy productivity growth of 4.1 per cent, 8.1
per cent and 2.2 per cent per year respectively. These sectors are globally
competitive and were able to transform and adjust their processes quickly.

On the other hand, domestic sectors, such as construction and retail and
food services, have seen poor real productivity growth. Productivity in the
construction sector declined by 0.2 per cent per annum from 2010 to 2013. These
sectors are struggling with the tightening manpower supply, with some companies
facing problems moving up the value-chain or improving processes. Nevertheless,
we must continue to press on with restructuring in these sectors.

The restructuring progress is gaining momentum. Businesses are changing
their mindsets and adapting to the new environment. Businesses have responded
well to the call to raise productivity, and take-up of our incentives has been
ramped up. To date, more than 17,000 companies have benefited from productivity
initiatives, with 7,000 companies in 2013 alone. Take-up is also healthy in
laggard low productivity sectors. More than 6,000 companies have tapped schemes
under the Building and Construction Authority's $250 million Construction
Productivity and Capability Fund.

The Productivity and Innovation Credit scheme, which provides businesses
with enhanced tax benefits and cash incentives for investing in a broad range
of productivity and innovation activities, saw take-up rates increase from
36,000, or 33 per cent of all active companies in Singapore in 2011, to 50,000,
or 40 per cent of all companies in 2013.

Similarly, we have seen take-up rates for the Innovation and Capability
Voucher scheme increase. From March 2 to June 13 this year, over 2,700 vouchers
were awarded to businesses.

Our labour market is more flexible than it was in the 1980s and our
workforce is higher-skilled - these are key advantages we did not have before,
and will help support our competitiveness even as we restructure the economy.

MTI refutes calls to slow the pace of
restructuring

It says economists are 'too hasty' in saying the
policy is not working

Source: Straits Times / Top of The News

THE Ministry of Trade and Industry (MTI) has strongly refuted economists
who have warned in recent weeks that the ongoing restructuring of Singapore's
economy is not working and needs to be put on hold.

MTI said these economists were being "too hasty" in making
this claim based on gross domestic product (GDP) growth figures from just one
quarter - namely the second quarter - which came in worse than expected.

It also disagreed that the restructuring pace is too fast for businesses
to adapt to. On the contrary, it said, the pace is "balanced" and
restructuring is taking place in phases to give firms time to adapt. "We
need to press on with restructuring at a steady, sustainable pace," it
added.

In a four-page response to questions from The Straits Times, MTI said of
the second quarter's growth figures, which have been a matter of concern:
"Weak GDP growth in the second quarter of 2014 is not reflective of the
impact of economic restructuring."

Fluctuations each quarter are to be expected given Singapore's export-oriented
economy, it added.

And the average growth of 3.4 per cent year-on-year for the first half
of the year is "healthy" given the current stage of economic
development.

Four years into a 10-year plan to boost productivity and median wages
while tightening the inflow of foreign labour, several established economists
have become concerned that the effort is hurting the economy.

Bank of America Merrill Lynch economist Chua Hak Bin said in a report on
Singapore to clients that economic restructuring is failing and Singapore is
losing its ability to seize growth opportunities.

Singapore Management University economist Augustine Tan raised similar
concerns in a commentary in this newspaper. He drew parallels with the
restructuring efforts of the early 1980s which contributed to Singapore falling
into a recession.

Rebutting their views, MTI cited a slew of figures which point not only
to the economy being in good shape, but businesses and investors also having
confidence in it going forward.

These include the monthly Purchasing Managers' Index, a leading
indicator of factory output. It has been in expansionary territory for six
consecutive months.

A Department of Statistics survey of about 1,500 firms in the service
sector in June found that 21 per cent expect business to improve in the second
half of the year, up from 15 per cent of those polled in April.

More companies are also being formed, and investment commitments and
unemployment levels remain healthy so far this year, while wages continue to
grow.

These show that "business sentiments and outlook for the rest of
the year have generally improved in tandem with an expected improvement in the
global economy", the MTI said.

On productivity, MTI said that while growth overall has been weak,
certain manufacturing sectors have achieved gains. It acknowledged that
industries like construction and retail and food, which have historically
relied heavily on cheap foreign labour, continue to be laggards.

But the situation is improving and gaining momentum, MTI said, and there
is greater take-up of productivity incentive schemes.

"We remain confident that the economy will be able to restructure
successfully over time to be more productivity-driven," MTI added.

SINGAPORE'S property market is having a slower year but one market
segment might be in for significant growth - resale strata-titled offices in
the central business district (CBD).

Prices of these properties are poised to climb this year owing to
healthy demand, particularly from Chinese buyers, according to property
consultancy CBRE.

Chinese buyers are the most active, having invested heavily in office
buildings such as Samsung Hub and Springleaf Tower, it said.

CBRE said prices of such office units could rise by 5 per cent to 10 per
cent this year, citing limited supply and rising office rents.

The average price for strata office resales was $1,677 per sq ft (psf)
in the second quarter, going by caveats lodged with the Urban Redevelopment
Authority. For new sales, the average was $2,073 psf in the period.

Research head Desmond Sim said yesterday that strata offices can appeal
to Chinese companies from industries such as insurance and commodities.
"These buyers likely have a big base in China where their business is
booming, and they want to venture out of China and expand to Singapore."

As a result of their thriving business back home, such firms may also
have pockets deep enough for them to buy an entire office floor in Singapore
rather than subdivided units, he added.

One recent resale transaction of strata office space was the sale of the
14th floor of Samsung Hub in Church Street for $39.7 million about two months
ago.

This works out to around $3,030 psf for 13,110 sq ft at the 999-year
leasehold office tower, which has 30 storeys.

Ms Sammi Lim, associate director of investment properties at CBRE, said
the buyer was a Chinese company believed to be in the trading industry.

The seller is believed to be Arch Capital Management, a Hong Kong-based
private equity real estate firm with links to Ayala Group of the Philippines,
according to a Business Times report.

Chinese firms also snapped up eight out of 12 floors of office space in
Springleaf Tower, put up for sale in the second half of last year, Ms Lim said.
Springleaf Tower is a 37-storey building in Anson Road. The firms were in
insurance, shipping and commodities.

The seller of all 12 floors was SEB Asset Management, part of German pension
fund manager SEB. Prices ranged from $2,200 psf to $2,400 psf, reports said.

Mr Sim said that some companies may prefer to buy completed offices
rather than units that are still under construction, so that they can move in
immediately.

Buyers of office space also "don't want to be held ransom to
landlords, so they become landlords themselves", he added.

One main reason is a widely expected spike in office rents in the CBD
over the next two years due to a supply shortage.

Analysts predict that prime office rents in the CBD could climb by as
much as 15 per cent to 16 per cent this year from last year.

This pace of office rental growth could even be faster than that in
major global cities such as London, New York and San Francisco, property
consultancy JLL noted in May this year.

The office components of mixed developments such as South Beach near
Raffles Hotel, DUO in Bugis and Marina One in Marina Bay could be completed
within the next few years.

[SINGAPORE] United Overseas Bank's non-performing loans (NPL)
surged in the second quarter as payments by some high-end property buyers
deteriorated.

Industry observers believe the situation could worsen as they do
not expect significant improvement in the sluggish residential market over the
next 12 months.

UOB said yesterday that NPL rose 11.2 per cent or S$232 million
over the previous quarter to S$2.31 billion, and was up 7.3 per cent over a
year ago.

But the NPL ratio was stable at 1.2 per cent in 2Q14, (1.1 per
cent in Q1, 2014 and 1.2 per cent in Q2, 2013) as total loans rose to S$193
billion, up 11.7 per cent year-on-year and 2.4 per cent on quarter. The
increase in NPLs was due to Singapore housing loans limited to a few accounts,
and loans in Thailand and Indonesia, said Wee Ee Cheong, UOB chief executive at
the bank's Q2 results briefing.

-By Siow Li Sen

DBS mortgage growth remains resilient despite
falling volumes

Source: Straits Times / Money

HOME loans have stayed resilient for DBS Bank amid a struggling property
market coping with a slew of cooling measures.

DBS chief executive Piyush Gupta said yesterday that he was "a bit
surprised" mortgages continued to see positive growth despite falling volumes.

"Earlier, we thought the mortgage growth would slow down to $2
billion to $2.5 billion growth for this year.

"Actually, we grew $2 billion in the first half. So, we're now
looking at getting the mortgage growth in the book by about $3.5 billion for this
year, which would make it the same as last year."

Mortgage growth at DBS for the year is expected to stand at about 9 per
cent, in line with the rest of the bank's portfolio, Mr Gupta added.

DBS housing loans came in at $50.82 billion at the end of June, up 2 per
cent from $49.85 billion at the end of March.

Mr Gupta also said that the bank's non-performing loans (NPL) were
"substantially lower than what was reported yesterday".

Rival United Overseas Bank had said on Thursday that its NPL for
Singapore mortgages was $80 million for the three months to June 30, owing to
weak payments by high-end property buyers.

Such buyers likely purchased the homes for investment or speculative
purposes.

One reason Mr Gupta cited for DBS' home loans doing better than expected
is that its percentage of owner-occupied loans comes at a high 85 per cent,
likely better than the market average.

New bookings for DBS home loans in the second quarter went up by 28 per
cent compared with the previous quarter, though it dropped by between 35 per
cent and 40 per cent year on year.

Data from the Urban Redevelopment Authority showed private home sales
rose to 2,665 units in the second quarter, up from 1,744 units in the year's
first three months.

Scheduled to be completed by 2018, Northpoint
City will be the property firm's largest mall in northern Singapore

Source: Business Times / Wealth

AS early as September last year when Frasers Centrepoint made a
stunning S$1.4 billion bid for a prime Yishun plot - and won by a 47 per cent
margin - market watchers had speculated that the developer had corporate
strategic reasons for wanting the plot, that perhaps it had plans to integrate
the new mixed-use building with its existing Northpoint mall.

They were right. Frasers Centrepoint yesterday unveiled the
amalgamated result, called Northpoint City and scheduled for completion by
2018.

Northpoint City will be the largest mall in northern Singapore
with 850,000 sq ft of gross floor area (GFA) and over 500 retail and dining
options, more than double the current offering at Northpoint. In fact, the new
retail wing is even larger than the existing Northpoint which has only about
365,000 sq ft GFA.

Northpoint City will also have Singapore's first Community Club
(CC) to be located in a shopping mall, which also makes it the first CC to be
fully air-conditioned.

-By Lee Meixian

Northpoint
extension will add 300 shops to mall

Source: Straits Times / Singapore

SINGAPORE'S first heartland shopping mall is to be extended, in a move
that will see it boast almost three times as many shops as it does now.

Northpoint, in Yishun, currently has 170 retail outlets, but about 300
more will be added when Northpoint City is completed in 2018.

Plans were unveiled yesterday by Foreign Affairs Minister and Law
Minister K. Shanmugam - who is also an MP for Nee Soon GRC - at an exhibition
at the mall. Construction work is already under way.

The upgraded shopping centre will feature an air-conditioned bus
interchange, a 4,400-sq-m town plaza and a roof-top community garden, as well
as Singapore's first community club based within a mall.

A 920-unit residential estate called North Park Residences will also be
built.

Mr Cheang Kok Kheong, chief executive officer of development and
property at Frasers Centrepoint Limited, said Northpoint City will be
"seamlessly linked" to the nearby MRT station, the town centre and
the current mall.

Business at Northpoint, which opened in 1992, will continue as usual, he
said.

The development is part of the Housing Board's Remaking Our Heartland
initiative that aims to spruce up mature estates.

"Nee Soon was among the first heartland towns to be selected,"
said Mr Shanmugam.

Yishun is also set to be boosted by more than 18,000 residential units,
both public and private.

Next year, it will get a 15km cycling path, while Northpoint City will
provide 300 cycling lots to encourage residents to exercise.

An exhibition showcasing the mall extension will run from now until Aug
10 at the atrium of Northpoint Shopping Centre.

Mr Shanmugam expects Northpoint City to bring the community closer.

"The results in Nee Soon speak for themselves," he said,
referring to Khoo Teck Puat Hospital, Yishun Pond and its lookout tower and the
upgrades to existing parks.

A HOUSING Board programme to install elder-friendly fittings such as
grab bars will now be available to 100,000 more households due to a lower age
criterion, and will offer improvements to not just one, but two bathrooms.

The Enhancement for Active Seniors (Ease) programme, introduced in 2012,
seeks to help prevent elderly residents from falling at home.

Homeowners can choose from fittings such as slip-resistant treatment of
floor tiles in one bathroom, and grab bars and ramps in the flat.

"Since its launch, HDB has received feedback from hospitals,
beneficiaries and their caregivers, on how Ease could be further
enhanced," said National Development Minister Khaw Boon Wan in a blog post
yesterday.

Previously, the scheme was available to Singapore citizen households
with an elderly family member who is either at least 70 years old, or aged
between 65 and 69 but requiring assistance for at least one of the specified
activities of daily living, such as dressing and moving around.

Starting yesterday, it is now available to citizen households with an
elderly member aged at least 65, or aged between 60 and 64 and requiring
assistance.

In addition, for households with two bathrooms, slip-resistant floor
tile treatment and grab bars will now be offered for the second bathroom as
well. It was previously offered for only one bathroom.

The scheme offers subsidies of up to 95 per cent. Households which opt
for the full scope of improvement works need pay only between $125 and $312.50,
with those in larger flats paying more. The Government covers the rest of the
$2,500 cost.

The expanded Ease programme is available in two ways. One is as part of
the Home Improvement Programme (HIP), an upgrading scheme for older flats.

The expanded Ease scheme will apply to future HIP projects polled from
Aug 1, and ongoing projects that are not yet complete.

For all other types of flats, including those which have undergone HIP,
flat owners can apply for the additional improvements either online or at HDB
branch offices.

Households which have already applied directly but where installation
has not yet been carried out will be eligible for the extra improvements. Where
installation has been completed, homeowners can still apply for the extra
items.

One of those who can now qualify is Mr Lee Yew Lee, 66, who is
semi-retired. He said he would consider applying for Ease if the HIP is offered
to his estate. "I don't mind, to prepare myself for old age," he
said.

But he will not go out of his way to apply yet. "Maybe when I get
closer to 70. But for now, I'm still young."

TOA PAYOH'S image as one of Singapore's oldest housing estates is set to
change with more land earmarked for new homes.

Although Housing Board flats in the township are among the priciest
here, its Build-to-Order (BTO) units were overwhelmingly subscribed on Friday
last week.

There were 9.1 applicants for each four-room unit and 3.9 applicants for
each three-room flat.

"In general, Toa Payoh is in a central location and properties will
usually benefit from being located there," said Mr Mohamed Ismail, chief
executive of PropNex Realty. The city-fringe town is the nearest HDB estate to
the Orchard Road shopping district by MRT - and home to two stations on the
North-South Line.

The Caldecott station, also within the estate, will serve as an
interchange for the Circle Line and Thomson Line. Vacant land near the station
has been set aside by the Urban Redevelopment Authority (URA) for new homes to
be part of Toa Payoh.

Earlier this year, a parcel in Toa Payoh Lorong 6 was placed on the
reserve list of the Government Land Sales Programme, which could yield 535
units if triggered for sale.

Consultants said the mature estate is predominantly public flats, with
no new condos for at least three years.

R'ST Research director Ong Kah Seng said the number of private homes
changing hands in the district fell after tough home loan curbs last year.
There were about 25 transactions per quarter before 2013, but just 15 resale
units are sold per quarter now.

But the three private condos in Toa Payoh have still seen strong capital
value and rental yield growth, consultants said.

The 590-unit 99-year leasehold Trevista is the newest, finished in 2011.
Resale prices averaged $1,460 per sq ft (psf) in the past year. Average monthly
rents were $4.10 psf, caveats lodged with the URA show.

The older freehold Trellis Towers was completed in 2000. Its 384 units
have averaged resale prices of $1,345 psf and rents of $4 psf in the past year.

Oleander Towers, completed in 2007, is the oldest private development in
Toa Payoh. The 99-year leasehold project has 318 units which recorded average
resale prices of $1,121 psf and average rents of $3.60 psf a month.

Rental yields at all three projects were between 3.5 per cent and 3.9
per cent, data from Squarefoot Research showed.

While residents of Toa Payoh are mostly served by shops within the HDB
estates, Mr Ong noted that the site of Toa Payoh Secondary School could be
rezoned for some retail facilities after the school moves out. It will merge
with Bartley Secondary School in 2016 as part of the Ministry of Education's
plans for schools to have a critical mass of students.

OUE Limited yesterday reported a 69.6 per cent drop in net profit
to S$4.4 million for its second quarter ended June 30. Revenue fell 10.6 per
cent to S$100.2 million.

The lower revenue was due to the "lacklustre Singapore
residential property market sentiment" and the absence of contribution
from the China hotels which were divested in September 2013, the developer
said. It is involved in residential, commercial and hospitality projects.

"There were, however, positive contributions from US Bank
Tower and Lippo Plaza which were acquired in June 2013 and January 2014
respectively," it said.

Earnings per share slumped to 0.49 Singapore cent, from 1.6
Singapore cents a year ago.

BUILDING construction and civil engineering company Sino
Construction Group, continuing its mine-buying spree, yesterday announced it is
acquiring all the coal assets owned by Australia- listed Guildford Coal Ltd for
US$25 million plus additional royalty - a price revised upward from its initial
offer after discussion with Guildford.

The coal assets, comprising thermal, pulverised coal injection and
thermal coal, are said to have an indicated resource of 227 million tonnes, and
an upper exploration target of 7.17 billion tonnes of coal.

On completion of the deal, the mainboard-listed firm will issue to
Guildford a convertible promissory note, and has the option to redeem the note
from Guildford if the volume-weighted average price of Sino shares two days
before the maturity date is at least S$0.24. It can convert the principal sum
of the notes into new ordinary shares, and allot and issue these to Guildford
at S$0.20 a share. Sino will also pay Guildford a royalty of US$0.35 for each
tonne of coal sold from the assets, for five years from the start of commercial
production.

Guildford will also be appointed as the only manager of the coal
assets, and will have a first and last right to be appointed as the contract
miner for the assets that move into commercial production, with a separate
management fee payable.

ECONOMIC restructuring efforts of the past have boosted growth, created
jobs and kept Singapore economically relevant to the world.

Yet they have rarely translated to election gains for the People's
Action Party (PAP) Government.

In contrast, the only time an election was held during an economic
recession, it resulted in huge swings towards the PAP.

This is shown by a look at the last four restructuring periods.

The 1984 General Election took place well into Singapore's first
restructuring efforts since independence. And the PAP's vote share fell to 64.8
per cent, from 77.7 per cent in 1980.

Five years before GE84, the Government introduced a policy aimed at
raising productivity through wage rises. The National Wages Council had
recommended three consecutive years of aggressive salary increases - of 20 per
cent a year - to move the manufacturing industry up the value chain. But it
spiralled out of control, and the restructuring took its toll on the economy.

Indeed, a year after GE84, the economy contracted by 0.7 per cent -
leading to a recession - Singapore's first since independence.

More restructuring came when the Economic Committee was formed in 1985
to find new ways to grow, and in fact, growth returned to the double digits of
the earlier boom years.

In the next election year, 1988, the economy expanded 11.1 per cent.
This did not help the PAP, however, as its vote share fell further to 63.2 per
cent.

This trend of economic restructuring yielding little at the polls would
repeat itself again over the next two decades.

Of course, it is difficult to draw a direct correlation between economic
restructuring efforts and electoral behaviour. This is because many factors
affect voting decisions including non-economic issues, as well as developments
in the external environment.

For example, GE2001 came amid a deep economic recession for Singapore,
with the 1997 Asian financial crisis followed by the dot.com bust in 2000 and
2001, and then the Sept 11 terrorist attacks.

And yet the GE in November that year saw the PAP's vote share rise to
75.3 per cent.

Observers describe this voting behaviour as a "flight to
safety", meaning that voters go with the party they know amid uncertainty.

A new restructuring period began in 2004, steered by the Economic Review
Committee set up in December 2001. Implementing their recommendations had been
delayed by Sars in 2003.

The economy recovered to average 8.6 per cent growth between 2004 and
2006.During that time the Government opened the door to more foreign workers to
spur economic growth.

However, in GE2006, the restructuring and higher economic growth did
little to move voters. The PAP's vote share fell to 66.6 per cent.

The high-powered Economic Strategies Committee was formed in 2009 and
its recommendations for the latest restructuring - involving a 10-year period -
kicked off the next year.Measures included reducing the foreign worker inflow,
while rolling out productivity-enhancing incentives such as the Productivity
and Innovation Credit Scheme.

Economic growth clocked in at a healthy 6.1 per cent in 2011.

However, at the next GE in 2011, a year into the restructuring, the PAP
recorded its worst electoral performance, losing Aljunied GRC, and seeing voter
share fall to 60.1 per cent.

Voters were concerned about soaring home prices, crowded MRT trains and
buses due to more foreigners, and fears that they would steal locals' jobs.

With the law requiring the next general election to be held at the
latest by January 2017, what does this mean for the PAP as this long and
painful economic restructuring presses on?

Much will depend on the progress of the restructuring efforts in the
next two years. Will there be a productivity boom as companies and industries
finally adapt?

Or could there be more transitional pains with an increasing number of
companies shutting down or relocating, higher unemployment and perhaps even a
recession, if there is another global economic crisis?

Or perhaps it will be more of a slow burn, with low economic growth,
poor productivity gains and companies continuing to feel the pain of the labour
squeeze and high costs?

Analysts and MPs agree that it is hard to draw conclusively any relation
between economic restructuring and the polls.

Singapore Management University Associate Professor of Law Eugene Tan
says: "Given the PAP's track record with economic performance, economic
slowdown and recessions tend to see voters being less willing to challenge the
status quo and (more inclined) to opt for the tried-and-tested PAP."

In which case, an economic crisis might actually work in the PAP's
favour as it did in 2001.

However the other two scenarios could be trickier.

If the restructuring efforts are paying off, and productivity growth is
high, and economic growth healthy, voters may be more confident to take a risk
against the PAP, as they have done in previous elections following economic
restructuring.

Similarly, in a slow-burn-type scenario the PAP could continue to lose
votes.

The current restructuring, while in part prompted by external
developments, is largely seen as being initiated by the current Government,
"so responsibility for success or failure is wholly the Government's",
says Prof Tan.

Even if the Government cannot be faulted for putting in much effort but
with little to show for it, that is not something voters will stomach, he adds.

"If the pains from current restructuring are laid squarely at the
Government, then it will have a bigger negative effect, and may even be a
potential game-changer in marginal seats," he says.

Says former Nominated MP Zulkifli Baharudin: "It will be painful
and that pain is going to happen right smack when you go for elections. I can't
see the PAP not being affected."

It was meant to make Singapore more competitive
and less reliant on foreign workers. But the hoped-for surge in productivity
has not happened with economic restructuring. Growth lags expectations. Workers
may not care, as pay has risen. Is it time for a breather? Insight checks this
out.

Source: Straits Times / Insight

AT THE four-year mark of the decade-long economic restructuring, to the
man in the street, it looks to be paying off - the inflow of foreign labour has
slowed, wages are up and unemployment remains low.

Yet for businesses, things are not so rosy. While economic growth is
slowing as predicted, the push for increased productivity does not yet seem to
be bearing fruit.

This is because the same measures to restructure the economy have
created stark labour shortages and driven up costs. A strengthening Singapore
dollar has also made exports more costly. These factors are hurting the
competitiveness of firms, making them look to move to other countries, and for
those not so agile, even threatening their survival.

However, despite their cries for help, the Government continues to
assure that all is well, urging companies to push harder to adapt and telling
doubters that things will improve in the second half of the decade.

Asked about the progress of restructuring in the Committee of Supply
debate in March this year, Minister for Trade and Industry Lim Hng Kiang said
Singapore is behind schedule and needs to try harder. "If you look at the
way the economy is still growing, the jobs we're still generating and the
labour force is still growing - one could argue that we're slightly behind the
curve."

But several heavyweight economists are now sounding the alarm bells,
adding backing to the chorus of protests by business owners and MPs against the
unrelenting pace of restructuring.

With Singapore's latest export numbers disappointing, and the economy
contracting by 0.8 per cent in the second quarter from the first, several
research houses rushed to downgrade their gross domestic product (GDP) growth
forecasts this year to 3 per cent - the very bottom of the 3 to 5 per cent
growth range predicted in this new era of growth.

Bank of America Merrill Lynch economist Chua Hak Bin declares that
restructuring is failing, Singapore is losing its competitiveness and
flexibility, and this will hurt the economy in the long run.

And Professor Augustine Tan of the Singapore Management University warns
that there could be a repeat of the recession in 1985 caused by restructuring too
drastically to raise productivity. "Perhaps we should pause in the
helter-skelter drive towards the holy grail of higher productivity and higher
wages and ask: Is it realistic to push so hard?" he says.

Are these economists right, and has the economic restructuring been too
fast, too furious? And if they are, what are the potential consequences,
politically and economically?

Failure to launch

THE restructuring drive began in earnest in 2010, acting on the
recommendations of the high-powered Economic Strategies Committee chaired by
Deputy Prime Minister Tharman Shanmugaratnam.

It said Singapore must raise productivity and reduce the foreign worker
inflow - moves aimed at fundamentally changing the way the economy grows, to
prepare Singapore for the future challenges of an ageing population and a more
competitive region, and to ensure its growth is sustainable and inclusive.

Since then, measures have been introduced to drive change: foreign
worker quotas lowered, levies raised, and the ratio of foreigners-to-locals a
company can hire reduced.

But four years on, the poor results of the restructuring drive are
worrying economists.

For one thing, economic growth has clearly been crimped by the
restructuring, growing slower by 1 to 2 percentage points than it should be,
they say.

Lee Kuan Yew School of Public Policy associate professor Tan Khee Giap
estimates that Singapore could be growing at about 5.5 per cent. But it has
only grown by about 4 per cent a year between 2011 and 2013.

Slower growth is to be expected as with any push to change the
underlying fundamentals of the economy, notes Dr Chua. But he adds that the
Republic could be losing what has been its strength - the ability to be
flexible to catch opportunities.

Rising wages while productivity gains remain elusive is also misleading,
he adds, as it means that the growth is not sustainable.

The official target has been for the economy to raise productivity by
between 2 per cent and 3 per cent a year. But in the last three years, this
target has not been met, with productivity growth averaging just 1.3 per cent
each year.

"Not being able to see any visible productivity improvements for
such a long period must surely raise doubts and question marks," says Dr
Chua, who was also one of the first economists to flag that dependence on
foreign workers and a growth-focused government agenda were creating widening
income inequality here.

Yet even as productivity growth fails to live up to expectations,
workers are enjoying higher pay. Management group Hay Group said in June that
the actual average salary increase for this year is forecast to be 4.3 per
cent.

There are two views on this. Some economists argue that wage growth
should follow productivity gains, so it is important to first boost
productivity. But others feel that higher wages will in turn force up
productivity, which was the thinking behind the wage restructuring in the early
1980s - although this eventually led to a recession in 1985.

DBS economist Irvin Seah points out that real median income per
household member grew by an average of 3.1 per cent a year between 2010 and
2012. Last year the real median income per household member grew by 3.3 per
cent. He, for one, asserts that "the widely cited measurement of
productivity is not a good indicator of true productivity growth. Real median
income has been rising steadily; the goal of restructuring is on target".

Meanwhile, businesses are feeling the pinch from the labour crunch -
which Nominated MP and Singapore Business Federation chairman Teo Siong Seng
says will only become more challenging as more measures kick in. "These
challenges, amid the backdrop of lacklustre productivity performance, rising
business costs and a weak external environment, are weighing heavily on
businesses, particularly SMEs."

Association of Small and Medium Enterprises president Kurt Wee says that
despite the pressure from businesses at many levels, the Government "feels
their hands are tied because they think they can't change course where labour
policies are concerned".

"We've had this conversation for three years, and each time they
say they can't turn back."

While in theory business owners understand what they need to do to raise
productivity - make more efficient use of workers by adopting technology - in
practice many find it challenging to adapt rather than perish, and feel that
the Government needs to cut them some slack.

Take one company, CE Engineering - its director Christian Eber has had
to roll up his sleeves to fix and fit air-conditioners himself alongside his
technicians, because there is not enough people to do the work. For the
business to run at optimal levels, he needs to have about 25 people on the
team. He currently has seven and struggles to find more.

"We tried to recruit ITE students who were on attachments with us,
but not a single one wanted to join us. Levies are so high that many of my
business owner friends have decided to work with their own hands rather than
pay the high levies," he says.

This predicament has been noted by DBS' Mr Seah, who observes: "The
restructuring rests upon the belief that by starving companies from easy access
to lower-skilled foreign labour, it'll force them to invest more on technology,
thereby raising productivity in the process. But reality has proven otherwise.
Not all business functions can be replaced by technology."

He says that apart from inhibiting growth, because the restructuring is
raising cost levels, there is a danger of a scenario of slow growth and high
inflation, a phenomenon that could lead to negative real wage growth over time.

Adding to the woes, the restructuring is taking place amid an uncertain
global environment. As well as the crises in Ukraine and the Middle East, there
are questions over China, Europe and the United States. Both the World Bank and
the International Monetary Fund have downgraded their global growth forecasts
this year.

The environment has led to a stronger Singdollar - it is up nearly 2 per
cent against the US dollar - making Singapore's exports more costly and less
competitive relative to others.

Taken all together, the pace of change and restructuring has been
punishing and it could lead to "killing off the goose that lays the golden
egg", worries Ang Mo Kio GRC MP Inderjit Singh.

"We have been too ambitious and failed to understand the real issues
(on rents and labour costs) companies are facing as we went for rapid economic
restructuring. We are today losing our competitiveness as our costs have
skyrocketed and we face a tight manpower situation," he says.

While he thinks this restructuring policy is "far-sighted and the
right one for the country", the Government has been too ambitious in
wanting to see results quickly. This has hurt many companies and resulted in
closures and failures for some that could have become stronger companies had
the rate of restructuring been more measured, he says. "It is urgent that
someone takes a closer look at the problems created as a result of the
restructuring policies and addresses them systematically to rebalance
things," he adds.

Time to pause?

MR SINGH thinks a time-out is called for. "Overall, I think we are
going to be worse off with the current situation. I would rather see companies
have a little more breathing space than to force the restructuring efforts,
hurting companies more than necessary."

Taking a pause has its advantages because the restructuring will still
continue, just at a slower pace, say economists.

Among the suggestions of how to make use of such a time-out, Dr Chua
says the impact of foreign worker levies may not be fully understood and should
be looked at further.

West Coast GRC MP Foo Mee Har says the policy approach needs to be more
multi-dimensional, taking into account overall productivity plans of companies
and giving them more room to manoeuvre. She cites the problems faced by a company
wanting to be leaner - to re-engineer its processes and buy more machines, and
to participate in Singapore's call to hire more women, it needs to invest time
to get all these things in place.

"If these people are already invested (to restructure) and you have
evidence that they are doing all these things, can they have a bit more slack
regarding the tightening of manpower policy and adapting to new rules?"
she asks.

However, such a pause could be economically and politically unpalatable.
The economic costs of failed restructuring are huge, and the livelihoods of
each individual business owner must be taken into account. And if the
restructuring efforts continue to yield little in results, it could exact
further political cost on the PAP.

The dilemma for the PAP is that it may also be turning another large
voting bloc - SME owners and employees - against it. Says Mr Singh: "SMEs
hire two-thirds of people so the employees of SMEs who see their companies
hurting will also be unhappy."

Others say that there is actually no need to hit the pause button on
restructuring.

Mr Liang Eng Hwa, chairman of the Government Parliamentary Committee for
Finance and Trade, is one who keeps the faith, noting that the results of the
push will only be seen with time. "This is a leap of faith journey and we
have no other choices. To revert back to our old way of growth would also not
yield higher real growth either, as we have basically reached the limits and
the physical and social constraints. There is no turning back now," he says.

Responding to concerns, a spokesman for the Ministry of Trade and
Industry points to positive business expectations in the services sector and
low unemployment, among other data, as evidence that there is no need to get
too alarmed about Singapore's economy. It is too hasty to draw such conclusions
from a single quarter of economic data.

The productivity drive is also yielding results in sectors such as
precision engineering and transport engineering, although progress in more
domestic sectors such as construction and retail remain poor. "We are
restructuring our economy at a balanced pace," she says.

Indeed, closures of companies - a measure of the uncertainty of the
economic climate - have not skyrocketed, and therefore neither has
unemployment. Between 2010, when the squeeze began, and 2013, company cessation
climbed from 15,134 a year in 2010 to 19,007 in 2011. But it has been on a
decline over the last two years, falling to 17,376 last year.

For every 100 new companies formed over that four-year period, 52
closed. This is comparable to the 51 company closures for every 100 new
companies registered during the high-growth four-year period from 2003 to 2006.

It could be argued that while larger companies are more resilient,
smaller firms have struggled, but again the statistics show otherwise. For
smaller businesses not required to register as companies, from 2010 to 2013,
there were 99 closures for every 100 new businesses formed. This was lower than
the 118 businesses closed down for 100 new businesses formed from 2003 to 2006.

Economic restructuring is always painful, and often the time of
transition is one of slower growth, and sometimes even recession. On the
Government's part, its challenge is to exercise judgment as to how fast to push
towards a goal that can be reached only some time in the future, while
moderating and managing the shorter-term impact on small businesses and
employees.

HONG Kong property developers, recently vexed by a spate of
government tightening measures, saw their earnings rebound in the first half
thanks to robust demand. Analysts are pencilling in a sustained sales pick-up
for the rest of the year.

LONDON — The “edge is coming off” the United Kingdom housing
market and that may start to affect the wider economy by the end of the year,
said Bank of England (BoE) deputy governor Ben Broadbent.

Although near-term growth indicators are quite strong, central
bank officials predict some softening in economic expansion, Mr Broadbent said
in his first interview since taking over the running of monetary policy. The
size of Britain’s household debts supports the case for gradual and limited
rate increases, but not the argument for leaving the benchmark interest rate at
0.5 per cent, he said.

The comments underscore the challenges the BoE faces as it
balances the risk of stoking inflation, by increasing borrowing costs too late,
against the need to secure Britain’s economic recovery. The housing market, a
focus of policymakers’ thinking in the past month, has turned out weaker than
the BoE forecast, he said.

“It’s clear that we have already had something of a dip even
relative to the central expectations that we had six months ago at the
beginning of the year,” said Mr Broadbent, who began his new job on July 1.
“You can see, certainly in quantity and some of the near-term price indicators,
some of the edge is coming off.”

As the London housing boom spread across the country, financial
stability officials took action last month to prevent people taking on high
loan-to-income mortgages they might struggle to afford should interest rates
increase.

UK household indebtedness, at about 140 per cent of gross
disposable income, remains higher than the United States, Germany, France and
Japan. UK household debt climbed to a record £1.45 trillion (S$3.05 trillion)
last month.

BoE’s steps, along with the introduction of tougher affordability
checks in April, may already be having an effect. Lenders approved almost 10
per cent fewer mortgages in the second quarter than the first and mutual
financial institution Nationwide Building Society said yesterday that house
prices grew 0.1 per cent this month from the previous month, the slowest pace
since April last year.

Freddie Mac (FMCC), the government-backed mortgage giant, sold $659 million of “deeply” delinquent homeloansin its first offering of such debt.

Twenty-two potential buyers participated in the auction, which was conducted by affiliates of Bank of America Corp., the McLean, Virginia-based company said today in an statement. It didn’t disclose the price, and won’t be naming the buyer, according to Tom Fitzgerald, a spokesman.

The company, which “selected the winning bidder on the basis of economics,” will “continue to look for opportunities to reduce exposure to less-liquid assets in its investment portfolio,” it said in the statement.

Freddie Mac and rival Fannie Mae (FNMA) have been stuck with a bevy of soured mortgages, bought out of bonds they guaranteed, after a surge in defaults amid the U.S. housing crisis. The companies, which were seized by the government in 2008, previously sought to recoup value themselves by modifying the loans or selling homes after foreclosures.

The loan sale comes as investment firms such as Lone Star Funds, One William Street Capital Management LP and Ellington Management Group LLC seek to gobble up bad home loans as the housing market recovers, pushing up prices.

“We’re not going to do transactions that are wealth transfers to private investors,” Freddie Mac Chief Executive Officer Donald Layton said on a conference call with reporters in May.

The company, which owns or backs $1.9 trillion of housing debt, held $169.1 billion of loans on June 30, according to monthly disclosures. It’s also begun repackaging reperforming and modified mortgages into new bonds that it guarantees.